On May 13, 2019, the Supreme Court, in a 5-4 decision, affirmed
a Ninth Circuit ruling that permitted a massive consumer class
action against Apple concerning the Apple App Store to proceed,
even though the prices at issue were set by independent app
developers, not Apple. The decision clarifies a fundamental
ambiguity in the Supreme Court's 40-year old Illinois
Brick precedent, which held that only direct purchasers have
standing to seek damages for antitrust violations. Apple Inc.
v. Pepper, __ U.S. __ (May 13, 2019).

Background

Apple permits iPhone owners to purchase apps only through the
Apple App Store. Apple generally permits any app developer to list
its apps for sale in the App Store (though there have been some
well-publicized exceptions). The app developer specifies the price
for its app (although any non-zero price must end in .99). Apple
collects a 30% commission on every sale through the App Store and
remits the balance of payments to the developer.

In 2011, four iPhone owners filed suit in the Northern District
of California, alleging that Apple had unlawfully monopolized the
aftermarket for iPhone apps. Plaintiffs alleged that if there were
other outlets through which consumers could buy apps, Apple would
not be able to maintain a 30% commission rate and prices for apps
would be lower.

Apple moved to dismiss on the basis of the Supreme Court's
1977 decision in Illinois BrickCo. v.
Illinois¸431 U.S. 720 (1977). Illinois Brick
held that federal antitrust damages actions could be brought only
by a direct purchaser who purchased the overpriced good from the
alleged antitrust violator. The Supreme Court was concerned that
allowing indirect purchasers to sue would introduce enormous
difficulties of proof, as indirect purchasers would have to
establish how much of the overcharge had been passed on to them as
opposed to having been absorbed by the direct purchaser. In
addition, because the Supreme Court had previously held that
defendants could not interpose a "pass-on"
defense—that the direct purchaser plaintiff had passed on the
overcharge to its customers—a contrary rule would have
created the specter of duplicate recoveries by different plaintiffs
for the same overcharge. Hanover Shoe, Inc. v. United States
Shoe Machinery Corp., 392 U.S. 481 (1968).

The District Court granted Apple's motion to dismiss.
However, the Ninth Circuit reversed, finding that the alleged
monopoly was in distribution and the Plaintiffs had dealt directly
with the alleged monopolist. In 2018, the Supreme Court granted
certiorari.

Arguments

The briefing and oral argument before the Supreme Court made
clear that the parties had very different concepts of Illinois
Brick. In Illinois Brick, the plaintiff was removed
from the defendant in two senses: it was not in privity of contract
with the defendant, and it did not pay a price set by the
defendant. This arrangement is typical of traditional distribution
involving a physical good: as the good moves through the chain of
commerce, each successive buyer deals with a seller who specifies
the price. But the Apple case involved a more complex
model. Apple sells distribution services to developers (for which
it charges an allegedly monopolistic 30% commission) and
facilitates the delivery of apps to consumers by acting as an agent
for the developers. On the consumer side, it is in contractual
privity with the consumers, to whom it delivers the apps and from
whom it collects payment. But it is the app developers who bear the
brunt of the 30% commission in the first instance, and it is the
app developers who specify their prices for the apps—which
might be increased 30% as a result of the commission (if the app
developer can "pass on" the entire commission), might not
be increased at all (if the app developer absorbs the entire
commission), or might be somewhere in the middle.

At oral argument, Justice Kagan seized on the question of
"what was Illinois Brick about? Was it about a vertical supply
chain or, instead, was it about a pass-through theory?" She
noted that in Illinois Brick and in all the court's
prior cases, "you had both" but in the Apple case
"this is not a vertical supply chain [problem] but there is
still a pass-through [issue]."

Apple, of course, emphasized the pass-through issue and that the
proposed class action had all of the difficulties of proof that
arose in Illinois Brick. In addition, because app
developers might also sue—complaining that they were forced
to bear a 30% commission—Apple might be subject to multiple
recoveries on the same overcharge. The United States, as amicus
curiae, supported Apple.

Plaintiffs, for their part, emphasized the supply chain issue
and argued that Illinois Brick should be understood as a
bright-line rule permitting lawsuits by persons who dealt directly
with the alleged antitrust violator and prohibiting lawsuits by
persons who did not. Thirty States and the District of Columbia
filed an amicus brief in support of Plaintiffs and went
further: they argued that the court should overrule the
Illinois Brick precedent in its entirety and permit
indirect purchaser lawsuits in federal court.

Decision

In a majority opinion authored by Justice Kavanaugh, the court
adopted the Plaintiffs' view and affirmed the Ninth Circuit.
The decision is Justice Kavanaugh's first antitrust decision on
the court, and only his fourth majority opinion overall. The
court's four most liberal members joined Justice Kavanaugh.
Justice Gorsuch, joined by Justices Roberts, Thomas and Alito,
dissented.

The court's majority took a straightforward approach:
Illinois Brick permits suits by direct purchasers and
Plaintiffs were direct purchasers from Apple. The court found
support for this conclusion in the language of the Clayton Act
(which permits suit by "any person who shall be
injured in his business or property by reason of anything forbidden
in the antitrust laws") and in precedent that the court said
provided a "bright-line rule" that direct purchasers had
standing to sue. The court rejected "Apple's effort to
transform Illinois Brick from a direct-purchaser rule to a
'who sets the price' rule." In the court's view,
this would result in arbitrary distinctions and the evasion of
antitrust liability by monopolistic retailers who exercise their
power through commissions on prices set by manufacturers as opposed
to through retail mark-ups. The court was also not persuaded that
Apple faced a risk of "multiple parties at different levels of
a distribution chain . . . trying to recover the same
passed-through overcharge initially levied by the manufacturer at
the top of the chain." Rather, while Apple could face suit by
both consumers and app developers, such "[m]ultiple suits are
not atypical when an intermediary in a distribution chain is a
bottleneck monopolist or monopsonist (or both) between the
manufacturer on the one end and the consumer on the other
end." Moreover, the court insisted, the damages that each
seeks are different. The consumers seek some portion of the
allegedly monopolistic 30% commission (a damages calculation that
requires first showing how much the 30% commission exceeds a
competitive rate, and then showing how much of that overcharge was
passed on to consumers and not absorbed by the app developers). In
the court's view, the app developers "would seek lost
profits that they could have earned in a competitive retail
market."

The dissenting justices accused the majority of engaging in
empty formalism—focusing on who is or is not in contractual
privity with the defendant—and ignoring the economic
substance of Illinois Brick, which focuses on "the
traditional proximate cause question where the alleged overcharge
is first (and thus surely) felt." In the dissenters' view,
the existence of an intermediary that set prices and might have
absorbed some or all of the overcharge meant that Apple could not
be the proximate cause of Plaintiffs' damages. The dissenters
suggested that the majority rule could easily be evaded by
Apple's restructuring its arrangements so that consumers pay
developers in the first instance and developers in turn pay a
commission to Apple. The dissenters were also much less sanguine
that Apple faced no risk of duplicative damages. And, indeed, if
developers are seen as purchasers of app distribution
services from Apple, rather than sellers of apps to Apple,
it seems likely that both app developers and consumers could seek
to recover the same allegedly monopolistic 30% commission.

On one point, the majority and dissent agreed: the case did not
present an opportunity for reconsidering Illinois Brick.
The majority noted that in light of its ruling in favor of
Plaintiffs there was no occasion to consider the question. The
dissent also commented on the argument and that "[m]aybe there
is something to these arguments; maybe not." But in the
absence of "adversarial process in a complex area" the
dissenters would also not reach the issue.

Observations

The case is not over. Despite news accounts
predicting that Apple will be forced to trial immediately in a case
with multi-billion dollar liability, the case (despite being eight
years old) is only at the very first stage of litigation with the
Plaintiffs having survived a motion to dismiss. Apple has a number
of defenses that have not yet been litigated. For instance, there
are other elements to standing that may be problematic for
Plaintiffs. See Associated Gen. Contractors of Cal., Inc. v.
Cal. State Council of Carpenters, 459 U.S. 519 (1983)
(multi-factor test for finding standing in antitrust case). In
addition, Plaintiff's theory is that Apple monopolizes an
aftermarket consisting of apps for the iPhone. Plaintiffs
make no argument that Apple monopolizes the market for phones or
the market for all apps. Aftermarket cases are difficult to make
out because in many instances competition in the foremarket (here,
phones) will prevent the misuse of market power in the aftermarket.
Plaintiffs also may face difficulty in obtaining class
certification because many members of the class may have suffered
no injury.

What to make of Justice Kavanaugh? On the same
day the New York Times ran a front page article about the
differences between Justices Kavanaugh and Gorsuch (A. Liptak,
"2 New Justices Tilt Rightward, But Not as One," New York
Times, May 13, 2019, page A1), the case illustrated the difference
starkly. Justice Kavanaugh not only joined the four liberals, but
wrote in surprisingly warm terms about private antitrust damages
suits: he noted "The plaintiffs seek to hold retailers to
account if the retailers engage in unlawful anticompetitive conduct
that harms consumers who purchase from those retailers. That is why
we have antitrust law." He concluded with a paean to the
Sherman Act, which "Congress overwhelmingly passed and
President Benjamin Harrison signed." For his part, Justice
Gorsuch again joined the court's most conservative
justices.

Whose rule is easier to evade? Both majority
and dissent accused the other of formulating easily evaded rules.
The majority noted that a monopolist retailer could avoid the
dissent's rule by simply moving to a commission structure
rather than a mark-up structure on goods purchased from a
manufacturer. The dissent argued the opposite: the majority's
rule could be avoided by restructuring the flow of funds such that
consumers paid the manufacturer in the first instance and the
manufacturer then paid the retailer. In practice, the dissent's
suggestion seems more difficult to operationalize in most contexts.
It would be difficult for a traditional brick and mortar retailer
to act as a payment agent for its many suppliers. But in
e-commerce, the dissent's idea may be feasible and may be a way
for businesses to limit their federal antitrust exposure. This is
an important issue for all companies in an intermediate
role—who are both buyers and sellers of a good or
service—to consider.

The reality is that both direct purchasers and indirect
purchasers can and do sue for the same damages. Neither
majority nor dissent considers the effect of state laws that reject
Illinois Brick. In many states, legislatures have adopted
or courts have construed state laws to permit indirect purchasers
to sue for antitrust violations. Moreover, because of the 2005
Class Action Fairness Act, large indirect purchaser class actions
arising under state law typically wind up in federal court
alongside direct purchaser actions. The result is that in most
cases indirect and direct purchasers seek to recover damages for
the same overcharge, and the complications and inefficiencies that
motivated Illinois Brick are not avoided. Whether a
particular indirect purchaser may recover is a function of the
happenstance of where the purchaser lives or engaged in a
transaction with the defendant. And Defendants remain forbidden by
the Hanover Shoe decision from asserting a pass-on defense
against the direct purchasers. Although neither the majority nor
the dissent reached the issue, this is not the first time the
suggestion has been made that a more sensible approach to antitrust
law might result if both Illinois Brick and Hanover
Shoe were overturned and, as the dissent suggests, "all
potential claimants to the single monopoly rent be gathered in a
single lawsuit as necessary parties."

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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Successfully navigating antitrust agency investigations requires a familiarity with Department of Justice and Federal Trade Commission processes, as well as insight into those agencies and their leaderships' current priorities ...

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